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The most important charts and themes in markets and investing…
1) Call It a Comeback
What a comeback. The Nasdaq 100 is now up 33% from the October lows, at its highest level since April 2022.
NVIDIA and Meta (Facebook) are leading all stocks in both the S&P 500 and Nasdaq 100, more than doubling so far this year.
Apple’s 34% gain leaves the largest U.S. company only 3% below its previous all-time high. Microsoft, the second largest company, has rallied 32% this year and is now withing 6% of its all-time high. By comparison, the overall S&P 500 is 11% below its peak from early 2022 and Bonds ($AGG) are still 13% below their prior high.
As a result of their outperformance, the combined weighting of Apple and Microsoft has risen to 14.1%, the highest for any two companies in the S&P 500 index with data going back to 1980.
The primary factors pushing stocks higher this year?
Lower inflation (4.9% YoY), an expectation that the Fed may be done hiking rates, and better-than-expected earnings.
On the last point, with 93% of companies now reported, S&P 500 earnings are up 8% year-over-year, significantly better than expected. And the major cost cutting initiatives which started last year have led to an expansion in profit margins to 11.8%, the highest we’ve seen since Q1 2022.
2) 2023 = Inverse of 2022
The worst performing areas of the equity market in 2022 (Nasdaq/Tech/Growth) have been the best performers thus far in 2023. And the best performers from 2022 (Energy/Value/Equal Weight) have become the worst.
Value stocks have significantly unperformed growth this year, resuming a trend that had persisted for much of the last decade.
And small caps have underperformed large caps by a wide margin, with relative strength at its lowest levels since 2001.
3) Rising Valuations
The median price to sales ratio in the Nasdaq 100 has moved up to 5.4x, its highest level since last August. It bottomed at 4.2x last October, which was >50% lower than the peak valuation of 8.5x in November 2021.
Here are the 10 highest Price to Sales Ratios in Nasdaq 100 today…
- NVIDIA $NVDA: 29x
- Lucid $LCID: 18x
- Intuitive Surgical $ISRG: 18x
- Seagen $SGEN: 17x
- DexCom $DXCM: 16x
- Datadog $DDOG: 16x
- Cadence $CDNS: 16x
- CrowdStrike $CRWD: 15x
- Verisk $VRSK: 15x
- CoStar $CSGP: 14x
The expectations for all of these companies are high, but nothing compares to euphoria surrounding NVIDIA and the anticipated AI boom.
At 29x sales and 182 earnings investors have not been this optimistic on its future prospects since 2000.
What happened after that?
NVIDIA stock declined over 90% and was lower 14 years later…
Will the exact same thing happen today?
No – every time is different. But when investor expectations are this high, it becomes increasingly difficult for a company to “grow into” that high valuation with an increase in sales and profits. More often than not, reality does not meet the lofty expectations, and we see a reversion to the mean in terms of the multiple and stock performance.
NVIDIA has been the best performing stock in the S&P 500 over the last 10 years, up over 8,000%. But the odds of a repeat performance in the next 10 years are essentially 0, with NVIDIA’s market cap now at $773 billion (5th largest company in the S&P 500). An 8,000% gain from here would mean that its market cap would grow to over $61 trillion (all of the S&P 500 companies combined currently have a market cap of $37 trillion).
4) Pain at PayPal
Not everything in tech is booming this year. PayPal is now down 80% from its 2021 high, its largest drawdown to date. Its price to sales ratio has moved from a record high of 17x to a record low of 2.5x.
5) The Consumer Pullback
The University of Michigan Consumer Sentiment Index fell sharply in May to its lowest since last November.
Negative consumer sentiment has been persistent throughout the last year and is finally starting to translate into lower consumer spending.
US retail sales increased 0.5% over the last year, the lowest growth rate since May 2020 and well below the historical average of 4.8%. After adjusting for inflation, though, the story is far worse. Real retail sales fell 4.2% over the last year, the 6th consecutive YoY decline.
In 2022, retail sales held up remarkably well in spite of high inflation, with Americans saving less (Personal Savings Rate hit its lowest level since 2005) and borrowing more (credit card debt spiked).
If either of these trends reversed, I noted, we were likely to see a downturn in spending. We’re starting to see that now with the savings rate moving up to 5.1% from a low of 2.7% last year.
Borrowing, though, has continued to surge. Credit Card balances in the US increased 17% over the last year, the biggest spike since the 2001 recession.
This is becoming increasingly troubling with the average credit card rate now over 20%, a record high.
Rising interest rates and rising debt are a bad combination, making it more and more difficult to pay that debt back and crowding out spending elsewhere. Will debt levels begin to slow at some point in the next year? That seems likely, and when it does it should lead to an even bigger shock to consumer spending.
Speaking of shocks, Home Depot’s sales fell 4% over the last year, the largest YoY decline since 2009. Net income fell 8%, the largest YoY decline since Q1 2020.
Home Depot was one of the biggest beneficiaries of the covid stimulus programs, with people spending more on their homes than anywhere else.
But that trend seems to have ended, with high inflation taking its toll and the housing market in a recession. In their earnings call, Home Depot’s CFO noted customers were buying “fewer pricier discretionary items, a shift from “larger projects to smaller ones,” and softening demand for flooring, kitchen and bath items.
Target had a similar theme in its call, saying the “consumer is under pressure” and “running out of savings” due to “consistent inflation.” This has lead to a continued shift in customer behavior, buying more “necessities” and fewer discretionary items.” Target’s year-over-year revenue growth: under 1%, the slowest since the first quarter of 2019.
Who seems to be benefitting from this consumer shift? Walmart, which saw revenues grow 7.6% in the last year. Known as the lowest priced retailer, nearly 60% of its revenue comes from groceries, which have seen the highest increases in prices since the 1970s. Even if Walmart sold the same number of grocery items as last year, revenues would boom from the price increases alone. This seem to have been the cast as they noted sales of general merchandise declining mid-single-digits while sales of food and other consumables increased low double-digits.
Overall, its becoming a much more challenging environment for retailers, and that’s reflected in stock prices. The S&P Retail ETF ($XRT) is down 1% this year and remains over 40% below its 2021 high.
6) The Worst Time to Buy a Home?
Only 21% of U.S. adults surveyed by Gallop said it was a good time to buy a home, the lowest in the survey’s history which dates back to 1978.
Why are people so pessimistic?
High prices plus high interest rates which has led to a collapse in affordability.
The mortgage payment needed to buy the median priced home for sale in the US has moved up to $2,573, a new all-time high.
The mortgage payment needed to buy the median existing home in the US has nearly doubled over the last three years…
While prices are starting to move lower (1.7% YoY decline is the largest since 2012), it’s not nearly enough to make a difference.
Supply remains constrained as many would-be sellers simply can’t afford to move. Two-thirds of mortgages have an interest rate below 4% (vs. 6.4% rate today), and most of the buyers from the last few years could not afford the house they are living it if they had to buy them at current rates/prices.
The result: a standstill in the housing market with existing home sales down 23% year-over-year, the 20th consecutive YoY decline. That’s the longest down streak since 2007-09.
What would help? More supply, but housing Housing Starts remain depressed, down 22% year-over-year (12 straight YoY decline).
However, perhaps that’s set to change with homebuilder stocks on fire and confidence levels continuing to increase.
7) Recession Watch
A net 46% of US Banks are now tightening their lending standards, the highest since 2020 and at levels that have coincided with recessionary periods in the past.
The YoY growth rate in the Leading Economic Index (LEI) fell further into negative territory in April and is at levels that have signaled a recession in the past (2020, 2008, and 2001)…
Most of the components in the LEI continue to signal an upcoming slowdown, the most notable exception being the stock market.
Is the stock market right and everything else wrong or is the stock market whistling past all signs of a downturn? We’ll find out soon enough.
8) Lower Tax Receipts + More Spending
US Federal Tax receipts fell 6% over the last year, the largest YoY decline since June 2020 and before that May 2010. At least part of the drop was attributed to lower capital gains taxes paid in April as we went from a booming year for asset prices (2021) to the largest declines since 2008 (2022).
While federal tax revenue declined 6%, U.S. government spending still increased 7%. The result: a budget deficit of nearly $2 trillion.
Bigger deficits mean more debt. And that debt is becoming more costly each an every month. The Interest Expense on US Public Debt rose to $828 billion over the past year, a record high. If it continues to increase at the current pace it will soon be the largest line item in the Federal budget, surpassing Social Security.
9) Getting Better
Inflation is getting better, nearly everywhere you look:
- US Import Prices fell 4.8% over the last year, the largest YoY decline since May 2020.
- US Producer Prices (PPI) increased 2.3% over the last year, the 10th consecutive decline in the YoY rate-of-change and the lowest print since January 2021. PPI peaked at 11.7% in March 2022.
- Growth in rents slowed for the 11th straight month, with a year-over-year increase of just 0.3% (Redfin data).
- Fertilizer prices are down 59% from their peak last year, at their lowest levels since January 2021.
- Corn and Wheat are at their lowest levels since 2021.
- Wholesale egg prices are down 85% from their peak earlier this year.
10) Happy Workers
The percentage of people who are satisfied with their jobs hit a record high in 2022 (conference board survey). The biggest factor driving the jump higher in recent years: more flexibility for workers that has come with shift to a hybrid/remote schedule. If a happy worker is a more productive worker then it would stand to reason that this trend is here to stay.
A second factor driving the increase in happiness was the ability for many to quit jobs they didn’t like and move to positions that were a better fit. The quit rate hit a record high of 3% last year and is still above the historical average today.
And that’s it for this week. Have a great weekend!
-Charlie
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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.
